Fuzzy Game-Based Real Option Analysis in Competitive Investment Situation

In real option pricing, it is impractical to assume the net present value of expected cash flow payoff as an exact number because it is a forecasted vague one. The price can be defined as a fuzzy number to express its estimated uncertain values and the Binomial Tree is used to price a real option. A modified pricing approach to real options is thus proposed to transform the forecasted uncertain values evaluated by experts into some normal fuzzy numbers. Furthermore, Fuzzy Game is employed to find optimal strategy. The paper´s objective is to propose the method that fulfills the lacking competitive view in investment decision making. The approach consists of the combination of Real Option Analysis and Game Theory. The integration of these two methods helps a decision maker to view uncertainty of the project from competition perspective. A real investment case is given to illustrate the validity of the proposed approach.